Mortgage Advances Growth in South Africa (The Bugle)

So you took and advance on your homes’ access bond and put it all on outsider Heavy Metal in the main Durban July race this past week-end. Had you had this foresight, you could now buy that home of your dreams and would be one of the few residential homebuyers who do not raise mortgage finance to assist them with their purchase. For the rest of us, the ability to raise finance is key to being able to own your home. If you would like to be able to predict the growth in house prices then start by focusing on what is happening to the growth in mortgage advances. Home finance is the fuel that drives the property market.

To get a handle on the size of household mortgage advances in South Africa consider that total household credit balances are currently R1,3 trillion. Of this amount approximately R798,2 billion is represented by residential household mortgages. Total mortgages in the country, including commercial mortgages, amount to R1,092 trillion.  When you understand that 73% of all mortgages are residential household mortgages you begin to understand the importance of this pool of credit to our residential property market. The latest published figures are available to the end of April 2013 and show that mortgage growth for household residential properties grew by 2,7% year-on-year. This is low, especially considering that other components of overall credit such as household unsecured credit (comprising general loans, credit card debt and overdrafts) grew by 25,4%. 

Individuals can only take on so much debt – either short-term loans and credit card debt to pay for current expenditure or long-term debt in the form of a mortgage loan to finance a property, which grows in value over time. The rapid growth in short-term unsecured loans is to an extent crowding out the more desirable long-term mortgage loans. Even though household mortgages still account for 60,3% of all household credit balances this proportion has been steadily falling and was 64,1% just over a year ago in May 2012. Make no mistake that the banks are lending money – just not on mortgages to the extent that would ignite the property market. 

Ooba, as South Africa’s major player in the mortgage origination business, reports that the average deposit as a percentage of the purchase price is currently 16,9%, up from 15,1% a year ago. This indicates how important it is for a purchaser to have a deposit when buying a home and hoping to raise finance. As a general rule of thumb, be prepared to have a 20% cash deposit if you are hoping to secure the best terms on your mortgage. The average initial decline ratio (first bank decline) is currently 48,5%. Shopping around with an originator is smart as the ratio of applications declined by one bank but approved by another is 25,8%. Ooba’s effective approval ratio is therefore 64%. When looking to raise mortgage finance get the best possible advice from people in the industry who know and understand the criteria imposed by the banks

(Author: Andreas Wassenaar, published in The Bugle, 10 July 2013)